Scale matters for any business, but has outsized returns for platform businesses. Simply, a pipeline business, which produces and sells a product, gains unit cost advantages from scale.
A platform, on the other hand, gains unit cost advantages from growing scale, but really profits from a non-linear increase in value for end users, which leads to more transactions, typically. To put it another way, a typical firm gains when it sells more of whatever it aims to sell.
A platform gains when its members and participants buy and sell more of whatever they desire to sell or buy.
Platforms use a different business model from typical pipeline businesses, in other words. A pipeline business gains from selling more units. A platform gains by adding more participants, facilitating more transactions, embracing more solutions and satisfactions for users.
Digital-based applications platform firms scale so fast in part because of the economics of producing software, which has close to zero marginal cost at scale. Producing and distributing the next unit of a software product is quite low.
Digital marketplaces and platforms also scale fast because they orchestrate the commercial use of assets owned by third parties. Amazon does not manufacture the products it sells. Uber does not own the fleets of autos that its driver partners use. Airbnb does not own the rooms that its users rent from participant suppliers.
Marketplace platforms can scale as fast as they can add partners, which themselves organize the production of goods sold on the platform. Then the network effects kick in. The more product variety available, the greater the number of buyers have incentives to use the platform.
Also, the more buyers using the platform, the more valuable the platform becomes for sellers. The platform gains value as the number of nodes (buyers and sellers) grows and transaction volume and speed increase.
At some point, the large number of buyers also creates advertising value, creating an advertising platform as a byproduct of the marketplace transaction volume and user base.
Aggregation and orchestration also add value. Amazon and Alibaba create a viable real channel for small firms that would not otherwise be able to reach potential buyers. The marketplaces amass a huge potential audience and prospect base--global or national rather than local--as well as the fulfillment mechanism.
In a sense, huge marketplaces and platforms also aggregate skill, capital and other resources beyond the direct ability of any single firm to control. No single company can ever employ more than a small fraction of the talented, creative, smart or innovative people. In essence, a huge marketplace or platform makes all those resources available to be monetized.
Some will argue the shift to orchestration or aggregation will be hard for cultural reasons. Others will simply point out that creating a platform requires the assent of many many other entities. Participating firms must conclude that being part of any specific platform has business advantages. Participating buyers must conclude that the platform has value enough to make it a choice over other buying alternatives.
Nor is creation of a platform something a small firm can entertain. It takes resources to build platform scale. Firms that succeed in becoming platforms might start small, but they do not stay small very long.
To be sure, scale matters even for pipeline firms. We see the same general effect of scale when looking at profit and market share for any pipeline firm in any industry.
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